Despite the success of the Xbox, that was not Microsoft Corp.'s (MSFT) first choice plan in the gaming space, according to an IGN interview with a former Microsoft executive. Joachim Kempin, who was VP of Windows Sales at Microsoft for 20 years starting in 1983, says his former employer only decided to build the Xbox after a falling out with Japanese gaming giant Sony Corp. (TYO:6758).

I. Sony Console Worried Gates

The original Xbox and its successor, the Xbox 360, had their low points (red rings of death, for example), but have established themselves as a popular console gaming option, selling millions of units. The gaming unit is perceived as one of Microsoft's strong performing businesses.

Perhaps predicting both the rise of the console and tablet as replacements/challengers to the traditional PC, Bill Gates reportedly in the 1990s sounded the alarm when Sony announced the original PlayStation. Seeing Sony jump into the market, Microsoft became determined to beat its former partner, who was turning its back on PC gaming for a non-Microsoft alternative.

Describes Mr. Kempin:

The main reason was to stop Sony. You see, Sony and Microsoft…they never had a very friendly relationship, okay? And this wasn’t because Microsoft didn’t want that.

Sony was always very arm’s length with Microsoft. Yeah, they bought Windows for their PCs but when you really take a hard look at that, they were never Microsoft’s friend... but as soon as they came out with a video console, Microsoft just looked at that and said 'well, we have to beat them, so let’s do our own.

The original PlayStation launched in 1994. Then in 2000 Sony introduced the PlayStation 2, which added PC-like media player functionality and broader support for online gaming on third-party servers. A year later Microsoft countered with the Xbox.

II. Crafting a Console

The payoff of consoles -- by Sony's model, at least -- has traditionally been the licensing fees paid by game publishers. The hardware itself is often sold at-cost, or even at a modest loss. For that reason Microsoft had trouble convincing a PC maker to hop onboard the Xbox experiment.

Joachim Kempin, a 20 year veteran of Microsoft is spilling the dirt on the history of the Xbox.
[Image Source: Twitter]

Recalls Mr. Kempin, "I went out to several PC manufacturers and tried to beg them to do the Xbox thing and keep the device manufacturing out of Microsoft. The guys were smart enough not to bite, because they studied the Sony model and saw that Sony could not make money on that hardware model, ever. So they supplemented it with software royalties, and Microsoft copied that model."

As for Xbox profitability, he argues that developers have always been the winners; that Microsoft has managed to break-even, but not do much better than that. He comments, "They’re just maybe a little bit above breakeven, that’s all there is. This is not a big money-making machine for Microsoft."

A former Microsoft exec. claims the Xbox is not a big money-maker for the tech giant.
[Image Source: Gamasutra]

Microsoft is currently diving into a third-generation console, which is expected to launch this holiday season. After trumping Sony in the last generation (dubbed by some as the "seventh-generation") of consoles, there are some trouble signs for the upcoming Xbox 720. While the spec looks somewhat similar to Sony, Sony's hardware is reportedly slightly more powerful and considerably easier to develop for.

Microsoft also may alienate customers with its stance on used games; reportedly it is tying purchases to your Xbox Live account, as a means of stopping game resale (which it earns no cut from). Sony, while a long time support of strict digital rights management, has not yet announced a similar anti-resale provision.

"Microsoft has only two real profitable businesses, Windows server/client and Office, and the rest is failure, including Xbox that doesn't make money overall, considering its investment and past losses" (C) Tony "Asymco Preacher" Swash

Microsoft products (and earnings) are divided into five divisions: Windows & Windows Live, Microsoft Business, Server and Tools, Entertainment and Devices, and Online Services. The types of products and services provided by each segment are summarized below:

Zune died, Soapbox (youtube competitor) died, Windows Live died, MinMobile died, WP7 died, even Windows Live Mesh died. MS is a huge cemetery of dead stuff with only two things healthy so far - Windows and Office. Xbox is breaking even but consider is almost dead too given that profits are so low compared to what was invested in it.

And let's not even start about Surface RT :( This is just sad. This comes from a Surface RT owner btw. 64GB with Type Cover, typing on it right now.

No, I'm not against buying Apple devices because they are Apple, I just avoided Macs because of high price for not enough return for the buck and also weird preinstalled OS X instead of much more convenient Windows, also Mac has really lousy GPUs that are bad for gaming which also turns me off. Then I avoided iPhone just because the screen is way too tiny, Galaxy Note is so much more convenient and better for web and games (my mostly used kind of software on the phone), also I keep my music on 32GB MicroSD which is super convenient but works only with BB and Android phones hence I mostly used to buy BB7 and Android hardware in the past. With tablets right now Apple has close to the best tablet in iPad but still... I wanted SD card and I wanted widescreen tablets since I love my Walking Dead on a wide screen, this show looks lousy on 4:3 screen of iPad, and other movies too. Hence I went for Surface but then later I realized that Surface RT was a bad choice, I should have gone for Clover Trail Win8 tablet - all the advantages of Surface plus all my Windows software like MPC-HC and all sorts of nice Windows games like Plants vs Zombies, so right now I think Samsung Android phones are the best (with WP8 very close but still lacking a few important things like nice big screens) and Clover Trail Win8 tablets are the best for home tablet stuff. It's all about better screens and expandability/USB/SD support in case of tablets. If only Apple were making iPad with SD card, USB and 16:10 screen without moronic battery-devouring Cretina :(

Interesting that you mentioned Skype because one reason cited for the lack of carrier support for Windows 8 is Skype, for obvious reasons carriers don't want voice over IP, they hate it.

Microsoft seems to have spent a lot of money to do something that doesn't seem to make a lot of sense strategically. I am not saying that Skype is bad technology just that strategically, with Microsoft desperately needing every ounce of carrier goodwill to enable them to kick start Windows 8 phone as a viable phone platform, Skype seems to be mistake.

quote: Apple kickstarted iPhone without any carrier support or carrier promotion whatsoever, so why MS can't do the same?

First because Apple was first to game. Big advantage. But also because, rightly or wrongly, there was huge iPhone demand from the public and thus carriers very much wanted to carry and sell iPhones. iPhones currently make up the bulk of the sales of the major US carriers for example. So there were lots of positive reasons why the iPhone sold via the carriers.

Finally I would say that the problem with Skype is that is an actual disincentive to carriers, so they actually don't want Windows 8 to succeed, they are not even neutral. The carriers favour Android because it stopped Apple breaking their power, they tolerate iPhone because it is so darn popular with the punters but they don't like Windows 8.

quote: Interesting that you mentioned Skype because one reason cited for the lack of carrier support for Windows 8 is Skype, for obvious reasons carriers don't want voice over IP, they hate it.

Carriers hated VOIP a few years ago but not anymore. Verizon and AT&T charge by the GB for data and throw in voice and texting for free. Their biggest moneymaker by far is data. With the new data plans offered by Verizon and AT&T they would probably actually prefer that you talk on Skype and buy more data.

The real reason Microsoft is having trouble getting carrier support from Verizon (AT&T isn't an issue) is because Microsoft is refusing to allow Verizon to pre-install spyware as they do on every Android phone.

Also, Skype is available as a free download on every available smartphone so I don't know what makes you believe bundling it with Windows Phone would make carriers angry.

Doesn't really matter it shows Microsoft is far from a one trick pony. I could even break out how many companies they partially own as well which are also money makers. Heck they have a 10% stake in Dell now. The are the largest charity as well. I don't see Apple or Google trying to put an end to malaria.

Every company has money losing divisions but when you add it all up Microsoft makes tons of money. They can afford to lose 2.5 billion. They probably made more than that on Android licensing. If you look at the big picture over time if Microsoft can corner the home media market there is a ton of money to be made there.

Microsoft is starting to chip away at the Phone market, the tablet market is questionable but Microsoft has deep pockets and they can play for plenty of years trying to establish one, and Google search will fall someday because Bing is actually really good or something better will eventually come along. Some things take a few years to establish. Im amazed at the people who think its easy to enter an established market base and expect a company to make tons of cash on year one.

What's so astonishing is not just that Microsoft spent billions on the Xbox to gain so little and to fight for control of yesterday's technology (in five years consoles will be dead) but that they kept talking about tablets for close to a decade and were still caught with their pants down by the iPad.

I think there is a golden medium between your two opinions. In 5 years consoles would be dead from technology curve perspective. Mobile gaming platforms would reach the necessary power levels to provide the most immersible gaming experience. Online gaming where actual processing is done in the cloud and devices only need to provide streaming and user feedback would also become more widespread. Both of these trends will collide and kill the need for consoles. This does not mean that consoles can not enjoy at least another generation of successful ride. They will just be shifted into niches where they will be more popular in certain geographies and with certain consumers. Just like PS2 has enjoyed a strong sales years after PS3 and XBOX 360 were introduced.

Your favorite iPhones and iPads have absolutely ZERO tactile feedback. Secret of Mana on iOS pales in comparison with the button mashfest on the Super Nintendo version, and that's just for starters.

Your predictions are flat out wrong, and your man, Horace Deliu, loves talking out of his butt. You, then, are no more different than a politician, where the butt and the mouth are 100% interchangeable.

If it were Apple they would make it stupid simple to use and bank a couple of billion dollars in profits.

Although I am confused about the reliability portion of your comment. Does Apple have a bad track record with reliability that the general public does not know about? I still have an Apple IIc in my closet that boots up and plays Bards Tale and Hard Hat Mack. My iPhone 3G still cranks out tunes when I am at work almost 5 years after I bought it. Did I miss something?

he means the brains of the people using it will suffer catastrophic failure.

As far as hardware goes, you're either very lucky, or most of the people I know around me that use Apple hardware are all very unlucky. All of them have had some sort of hardware failure on their iphones (3, 4, 4s) soon after the warranty was up, and a couple had problems with their macbooks. None of them have the iPad, so don't have any information on that.

I have two friends I know that run Apple repair businesses and they are plenty busy. Plenty of failed Macbooks and tablets going out there. The issue is that they do fail just as much if not more than standard Windows kit.

Remember the cases may be bespoke but the guts are pure generic Foxconn quality. Just like all the rest.

However, the parts (with the Apple part no. tag on them) and disassembly are just far more costly and complicated. Spill a coffee over you Macbook and its a $1000 fix. In fact one of my friends said to me in about two years he'll have to shut down his business as Apple gear is becoming un-servicable. Basically if it fails outside of the years warranty it just gets thrown away.

"Intel is investing heavily (think gazillions of dollars and bazillions of engineering man hours) in resources to create an Intel host controllers spec in order to speed time to market of the USB 3.0 technology." -- Intel blogger Nick Knupffer